Good day, ladies and gentlemen, and welcome to the Dynatronics Fourth Quarter 2019 Earnings Call. [Operator Instructions]. At this time, it's my pleasure to turn the floor over to Mr. Brian Baker, CEO. Sir, the floor is yours..

Good morning, and thank you for participating in today's call. I'm Brian Baker, Chief Executive Officer and with me is our Chief Financial Officer, David Wirthlin. We issued a press release this morning announcing the financial results of our fourth fiscal quarter and full year ended June 30, 2019.

Today, I'll provide a brief commentary and then I'll turn it over to David for a financial report. I'll follow this up by providing guidance on our 2020 fiscal year. At the conclusion, we'll have the operator open the phone lines for questions. I will now ask David to remind you of our reliance on the safe harbor under the federal securities laws..

Thank you, Brian. Before we begin, let me remind you that during the course of this call, we will make forward-looking statements regarding our current expectations, plans, projections and financial performance relating to our business.

These forward-looking statements reflect our view as of today only, and they involve risks and uncertainties that could cause our actual results to differ materially from those discussed today.

Important factors that could cause actual results to differ materially from those projected or implied by our forward-looking statements today are included in our most recent 10-K and other reports filed with the SEC. We caution you not to place undue reliance on forward-looking statements we make this morning.

We undertake no obligation to update or revise forward-looking statements..

Thank you, David. By way of introduction, I've been with Dynatronics for about 1.5 years. I joined the company in February 2018 to lead Dynatronics' legacy operations in Utah and Tennessee. In May of this year, my role was expanded to Chief Operating Officer.

I focused a great deal of my time working with key distributors, our direct sales force and operational leaders at each of our locations. I believe the relationship I have fostered inside and outside the company will make my transition to CEO a natural evolution for employees, vendors and customers.

Before I joined Dynatronics, I was Head of Global Operations at SeaSpine in Southern California. I was part of the spinout management team from Integra Lifesciences and consolidated two Integra distribution sites, established operational leadership and information systems for the new organization.

Early in my career, I acquired and grew a company called Physician Industries, which I operated for nearly 14 years before I sold the business to Integra Lifesciences. My experience with Integra since that time enabled me to develop relationships with many of our shareholders and directors, including our largest shareholder, Prettybrook Partners.

Today, we are providing the report on our fourth quarter and fiscal year ended June 30, 2019. Let me start by focusing on a few highlights. First, we delivered on the most recent sales guidance.

We strive to forecast the business accurately, and we are pleased that our fourth quarter and fiscal year sales are in line with the guidance we provided on our last call. Second, we have been working to improve operational effectiveness and reduce costs.

We've made significant organizational and operational improvements that enabled us to reduce ongoing operating expenses by approximately $1.7 million in fiscal 2019. Third, the company generated positive cash flow from operations in fiscal 2019.

In the fourth quarter, we had short-term increases in our working capital related to the timing of international sourcing and collections. This negatively affected cash flow for the quarter. However, for the full year, we generated $326,000 in positive operating cash flow. Our overall strategy for the company remains steady.

We aim to become the recognized standard in restorative solutions. In the near term, our focus will be to continue improving our operational performance and to achieve our stated guidance. David will now provide a financial report..

Thanks, Brian, and good morning, everyone. I am pleased now to review the financial performance during the quarter and briefly cover the year-end results. Net sales for the quarter ended June 30, 2019, decreased $1.4 million or 8.2% to $15.5 million compared to $16.9 million in the same quarter of the prior year.

The decrease was primarily due to a reduction in sales of our physical therapy and rehabilitation products in both our direct and dealer channels. Gross profit for the quarter decreased $478,000 or 9.5% to $4.5 million, representing 29.3% of sales compared to $5 million or 29.7% of sales in the same quarter of the prior year.

Lower sales was the primary cause of the decrease, reducing gross profit by approximately $414,000. The decrease in gross margin percentage to 29.3% from 29.7% contributed about $64,000 to the reduction in gross profit.

Selling, general and administrative expenses, which includes research and development, for the quarter decreased approximately $596,000 or 10.9% to $4.9 million compared to $5.5 million in the same quarter of the prior year.

The decrease included lower selling expenses of $231,000, consisting primarily of lower fixed sales management salaries and lower commissions, a decrease of $132,000 in research and development expenses and a decrease of $233,000 in other general and administrative expenses.

Net loss for the quarter was approximately $232,000 compared to net loss of $538,000 in the same quarter of the prior year. For the fiscal year, I'll highlight just a few points. First, as Brian noted, we delivered on our most recent sales guidance with fiscal year 2019 sales of $62.6 million.

Second, we decreased SG&A expenses by $1.7 million and improved our operating profitability by $455,000. And third, we improved our net loss by $681,000. As of June 30, 2019, we had cash balances of approximately $256,000. We have an $11 million asset-based line of credit, pursuant to which we had borrowed $6.5 million.

It is worth noting that the June 30 line of credit balance was somewhat elevated. We expect the September 30, 2019, balance to decrease to approximately $5.5 million. This reflects decreases in our working capital accounts and positive cash flow from operating activities since June 30, offsetting the negative operating cash flow in the fourth quarter.

We currently have availability on our line of credit of about $2.2 million based on our current borrowing base. This concludes our summary of operating results. I will now turn the time back to Brian..

Thank you, David. In terms of our guidance for fiscal 2020, we expect consolidated net sales to be in the range of $58 million to $62 million. We expect the distribution of our revenue fee between quarters to align with historical trends. We historically have not given quarterly guidance.

However, with the first quarter nearly complete, we can say we expect fiscal quarter net sales to be in the range of $16.1 million to $16.3 million. Consistent with the past two fiscal years, we expect to generate positive cash flow from operating activities in fiscal 2020 with some volatility in quarters based on working capital changes.

We expect gross margin to be in the 31% range and SG&A to be about 31% of sales for the current fiscal year, including approximately $1.8 million or 3% of sales in noncash charges. We believe there continues to be opportunity to improve in all of our financial metrics.

The number of common shares outstanding as of June 30, 2019, was approximately 8.4 million. We expect our outstanding shares to increase by approximately 140,000 per quarter. Again, this guidance is based on our current operations and does not include the impact of any potential acquisitions.

All guidance is also subject to risk factors and other forward-looking statements and uncertainties contained in our filings with the SEC. As I've reflected on my time with Dynatronics, I am optimistic about the future of our company and the opportunity we have to grow in the markets we serve.

We have strong brands with excellent reputation in the market, and we are structuring the operations for long-term success. These changes will require some patience to be fully reflected in our financial statements, but I am confident that we are on the right path.

We will continue to execute on the necessary steps to bring growth back to the business and to deliver on our stated guidance. We appreciate and thank our investor base and employees for their ongoing support. We're committed to effectively serving our customers by providing restorative products that accelerate optimal health.

I will now turn it over to the operator for questions..

[Operator Instructions]. We'll go first to Scott Henry with Roth Capital..

A couple of questions. First, 2019, at least through the first half, had some rationalization of revenues or -- which created sort of difficult comps for 2020 because you're still going up against some of that rationalization.

The question is, from an organic revenue standpoint, should we be thinking about 2020 is starting to be a growth, modest growth albeit, but how should we think about the organic growth after factoring in some of the rationalization that's in the comps, but not in this year?.

Yes. Scott, it's nice to hear you on the call this morning. Coming to your question, as far as looking at revenue, we would like to reflect you back to what our [current] [ph] guidance is. We believe we got a good plan in place to hit those guidance numbers that we provided.

And I do see that there is some areas that we can continue to work on, be more tactical and enhance our customer relationships. For example, we have the advantage of having a well-known and respected brand in market, and we are leveraging that position to expand our product distribution to establish national distributors and regional dealers..

Okay. Another question with regards to gross margins, it's somewhat flattish in 2019 and 2020 guidance.

How should we think about the outlook for gross margins long term? And do you still target sort of a corporate goal of improving those even as high as 40% I think I've heard in the past? How should we think about that?.

Yes. I, Scott, would again just refer you back to our recent guidance on how we look at margins and how that was reflected and how our plans are.

And as you look beyond our guidance on profitability, I would look at it as, in the short term, we're protecting our [current] [ph] margins by controlling costs and really wouldn't want to go out further than what we have in our guidance..

Okay.

I guess the final question, and I recognize you don't have anything to announce today, but how should we think about the acquisitional environment out there? I mean would you be surprised if you didn't do a deal in 2020? Or I'm just trying to get a sense of what the environment is like and where in the process you are as far as looking for additional acquisitions..

Sure. Yes. We have a strong pipeline of companies that we have built up over the years, and we continue to add to that list. We are in various stages of discussions with several of those companies. And I would continue to look at it as we maintain a steady approach to our acquisition strategy, and we regard ourselves as value-oriented buyers..

[Operator Instructions]. And we'll go next to Nathan Weinstein with Aegis Capital..

Just on the Bird & Cronin and Hausmann, those are acquisitions consummated in 2017.

Do you have any comment to make on how those are performing now that you've had them in the organization for a couple of years?.

Nathan, this is Dave. Thanks for the question. We don't report on a division level, and we've kind of moved away from divisional organizational structure, but I can say that we're pleased with the performance of both of those acquisitions..

And just following up on the prior question where you were discussing the acquisition pipeline.

If you could just maybe make a comment about the environment? Have the acquisition multiples in the space risen? Are people looking for, I guess, more money for their companies? Do you have any sort of anecdotal comments you can make on the environment?.

Yes. Nathan, I don't think the environment has changed over the last year. It is still the pipeline companies that we did engage with historically. And again, I'll just reiterate, we're in various stages of conversation with those companies that we're talking with..

Okay.

And then the last question I have, just the $170 million goal of revenue for 2025, is that something that you guys are still thinking of as being attainable for the business?.

Yes. Our current strategy has not changed at all, Nathan. We maintain the focus that we put out there in our five year strategic plan. We are looking to become the recognized standard in restorative solution, and we stated objectives that we do want to grow organically and continue to look for opportunities to expand margin.

And again, we look at the acquisitions as part of our growth strategy as well..

[Operator Instructions]. Mr. Baker, there appears to be no further questions at this time. I'd like to turn the call back over to you for any closing comments..

Thank you for the questions and for your interest in Dynatronics. If you have any further questions, please direct them to our Investor Relations contact, Jim Ogilvie. Operator, you may end the call..

Thank you. And ladies and gentlemen, this does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and have a great day..